ISLAMIC ASSET MANAGEMENTJUNE 2009

“The Changing Insurance Landscape - What Survives?”

Dr. Zeid AyerChief Investment OfficerCIMB-Principal Islamic Asset Management

International Insurance Society and Insurance Commission of Jordan 45th Annual Seminar of the International Insurance Society

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ISLAMIC FINANCE

Islamic Finance reflects financial transactions and activities which are in accordance with the principles of Islamic law, known as Shariah.

Shariah is derived from the Quran (considered by Muslims to be the revealed Word of God) and the Sunnah (the sayings and doings of the Prophet Muhammad).

Shariah is perhaps best characterized as a set of principles governing all aspects of the day-to-day activities of Muslims.

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•The ban on interest

•The ban on uncertainty or speculation

•The ban on financing economic activities in certain sectors

•The profit- and loss-sharing principle

•The asset-backing principle

FIVE PILLARS OF ISLAMIC FINANCE

Islamic finance must be used towards real activities, e.g. trade finance, construction finance, leasing

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INTRODUCTION TO TAKAFULIslamic law prohibits conventional insurance as it contains elements of

Maisir – speculationGharar – uncertainty Riba – usury

Each participant contributes to a fund to cover expected claims while also benefitting from a share of investment returns.

Liabilities are spread amongst policyholders (both insurer and insured) and losses are divided between them

Management of the fund is by the takaful operator who utilizes either or combination of two Shariah-compliant contracts, Mudharabah and Wakalah

All investments in the fund are invested in a Shariah-compliant manner

Takaful: Shariah-compliant form of conventional cooperative or mutual insurance whereby participants pool their funds together to insure one another.

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TAKAFUL STRUCTURES

Wakalah model (more prevalent in Middle East) Takaful operator acts as an agent for the participants and manages the fund in return for a defined fee. There can sometimes be a performance-based fee.

Combined modelUtilises both contracts Wakalah is used for underwriting activities while Mudharabah is used for investment activities.

Mudharabah model (commonly used in Malaysia)Takaful operator manages the operations in return for a share of the underwriting surplus and a share of profit from investments.

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VARIOUS TAKAFUL STRUCTURES

Adaptation by asset managers is dependent on different form of fee/profit/surplus flows

ClaimsContribution

Participants

Contribution + Profit

Takaful Operator

Surplus

Tabarru’ Contribution

Less

Source: CERT Workshop on Takaful (February 2008)

Profit

Basic Mudharabah Basic WakalahModified Mudharabah Modified Wakalah

WakalahFee

Mudharabah share / Performance fee

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Most Islamic countries’ insurance penetration < 1% of GDP

Compare with: UK’s insurance penetration 12.4% of GDPUSA’s insurance penetration 9.4% of GDP

Islamic asset management an essential component to support projected takaful industry growth and development

Islamic Countries have:

Favorable demographics

Rising income

Demand for Shariah-compliant

products

TAKAFUL INDUSTRY POTENTIAL

2007: Takaful market USD 3.4 bn2012: Takaful market estimated between USD 6 and 7.7 bn

Source: E&Y, ICMIF

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SELECTION OF ASSETS

Islamic Equities

•Screened for Shariah compliance at the operational level

•Screening based on industry type, financial ratios, & tolerable benchmarks

Islamic bonds or Sukuk

•Trust certificates or participation securities granting investors an ownership claim to underlying assets along with the cash flow or profit and risks commensurate with such ownership.

•Differs from conventional bonds, which are based on the exchange of paper for money with interest imposed to measure returns and liabilities.

•Sukuk issuers must use proceeds in a Shariah compliant manner

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ISLAMIC ASSET MANAGEMENT

Against backdrop of financial meltdown, the next wave of product innovation aims to achieve ??

After being burnt, what do retail and institutional investors seek ??

INTEGRITY

TANGIBLE ASSETS

TRANSPARENCY

LOWER COSTS

Return to Basics—SIMPLIFICATION

A SOLUTION

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SOLUTION: BENEFITS WITH ISLAMIC INVESTMENT

1. Prudence & overall risk diversification

comes with integrating Islamic into the mainstream investment portfolio

2. Investment performance comparable to mainstream

YET enables one to invest with a social cause

3. Although can be seen as constraint from European perspective due to exclusion of certain industries

financial screening ratios on debt, cash, and receivables in the Islamic investment process see that the financial interests of the investors are looked after

4. Positioning Shariah compliant investing to a broader investor base successfully requires

there be no risk-reward disadvantage vs mainstream investing

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Products only relevant to Muslims

Covers Larger Investor Base

Both Muslims and Non-Muslims

Misconception The Truth is…

Not Inferior to Conventional Performance: Return, Volatility, Risk-Return Profile

Performance Drag

Products are too complicated

Only difference is the Islamic screening process

Restricted Universe2,545 stocks, USD 9.3 trillion market cap- Dow Jones Islamic Market World Index*

> 50% of SP500 is Shariah (by mkt cap)**

Low Debt + Limited Downside

Source: *Dow Jones,30/01/09, **Standard & Poors 17/2/09

WHY ISLAMIC WORKS: MITIGATING MISCONCEPTIONS

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INDEX COMPARISON: 10-YR ANNUALISED PRICE RETURN

Source: Dow Jones (as at 30/01/09)

GLOBAL INDICES 10-YEAR

Dow Jones Islamic Market World Index -2.14

Dow Jones World Index -2.19

U.S. INDICES 10-YEAR

Dow Jones Islamic Market U.S. Index -3.09

Dow Jones U.S. Index -3.65

BLUE CHIP INDICES 10-YEARDow Jones Islamic Market Titans 100 Index -3.11

Dow Jones Global Titans 50 Index -6.33

EUROPE INDICES 10-YEAR

Dow Jones Islamic Market Europe Index -1.94

Dow Jones STOXX TMI Index -2.82

HOW TO SELECT AN ISLAMIC FUND MANAGER

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HOW TO SELECT A FUND MANAGER

• End-to-end Shariah-compliant process

• Focus is on Islamic as a solution, not as a product offering

• Provides research and analytics

• In-house Shariah council

• Islamic credentials

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GOOD FUND MANAGER DELIVERABLES

• Islamic or not, performance is mostly driven by the skill of the fund manager and the supporting infrastructure.

• Integrity of Shariah may not translate into performance directly, but it may avoid reputational risk to the company.

• An Islamic asset management company with skillful fund managers, but with a weak Shariah component, may perform on the fund but may not gain respect from the industry.

• Some clients regard Shariah integrity with equal importance to investment performance.

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Shareholding Structure of CIMB-Principal Islamic Asset Management

Principal Global Investors, USA

A Leading Fortune 500 Diversified Global Financial

Services Group

50.0%

CIMB GROUP

South East Asia’s Largest Investment Bank

50.0%

CIMB-Principal Islamic Asset Management Sdn Bhd

• A joint venture between CIMB Group and Principal Global Investors, the asset management group of Principal Financial Group (PFG)

• Dedicated global franchise in Islamic asset management

• Leverages synergy of PFG’s 130 years of experience in global asset management and CIMB’s global leadership in Islamic Finance.

• Offers holistic and pure management of Islamic assets with end-to-end processes in accordance with Islamic principles

• Established insights on client needs

CIMB-PRINCIPAL ISLAMIC ASSET MANAGEMENT

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CIMB-PRINCIPAL ISLAMICAsia Pac x-Japan Cumulative Investment Performance

Source: CIMB-Principal & Bloomberg (1/8/06-30/4/09)

Composite performance

vs. benchmark

-40%

-20%

0%

20%

40%

60%

80%

Jul-0

6

Aug

-06

Sep

-06

Oct

-06

Nov

-06

Dec

-06

Jan-

07

Feb

-07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Apr

-09

Islamic APxJPN Selective Composite (USD) DJIM APxJPN (USD)

1M 3M 6M 1Y 2Y Since InceptionIslamic APxJPN Selective Composite (USD) 11.91% 17.90% 17.41% -35.20% -17.58% 11.22%

DJIM APxJPN (USD) 14.59% 24.46% 15.98% -42.01% -30.76% -13.54%

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GLOBAL SUKUK SELECTED AGGREGATE PERFORMANCE (as at 31 March 2009)

Source: CIMB-Principal

Cummulative Performance Since January 2005

0%

5%

10%

15%

20%

25%

Jan-

05

Mar

-05

May

-05

Jul-0

5

Sep

-05

Nov

-05

Jan-

06

Mar

-06

May

-06

Jul-0

6

Sep

-06

Nov

-06

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

Global Sukuk Selected Aggregate 3M KLIBOR

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Thank You

11Best Islamic Bank

in Asia2008, 2005

Islamic Products House of the Year Award

2008

1

Islamic Fund House of the Year

2008, 2007, 2006

1

Best Sukuk House

2008

CIMB-Principal Islamic Asset Management Full spectrum of Islamic investment solutions

customized to best meet global investors’ needs and objectives.

CIMB Islamic Accolades

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DISCLAIMERAll figures shown in this document are in U.S. dollars unless otherwise noted.

This document is provided to you for information only and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any security, product, service or investment, nor does it constitute investment advice and is not intended for distribution, or use by any person in any country where the investment service referred to is not authorized or which the dissemination of such information is contrary to law and regulation of the country. All information contained herein is confidential and is provided solely for internal use of intended recipient(s). The information in this document may not be reproduced, distributed or published by any recipient. The information contained herein has been derived from sources believed to be reliable and is current as at the publication date. Neither CIMB-Principal Islamic Asset Management Sdn Bhd, nor any of its officers, directors or employees accept any liability or responsibility in respect to the information or any recommendation expressed herein as no representation or warranty is made as to its accuracy, completeness or correctness of the information provided. The information in this document is subject to change without notice. Persons wishing to rely upon this information should perform their own independent evaluation of risks and benefits or consult directly with the source of information or obtain professional advice where appropriate. The value of your investment may rise or fall. Past performance is not reflective of future results.